A debt swap is a transaction whereby a credi- tor country’s claim against a debtor country, quoted in “hard” currency, is converted to an obligation to the creditor country other than servicing of the original debt owed. There are many types of debt swap operations. The most common are commercial operations, in which a claim is converted into equity capital in local companies, or to specifically defined advantages for the creditor country’s private- sector investments in the debtor country. The Debt Relief Strategy does not include this type of commercial debt swap operation. Instead the strategy deals with development- motivated operations whereby a debtor coun- try’s debt is converted into an obligation for the debtor country to use a specific amount in local currency for specifically agreed meas- ures, for instance in the health, education or environmental sector. The advantages of this type of debt swap operation are obvious. They intensify cooperation between creditor and debtor countries on development and environ- mental programmes, they help channel much- needed local funds to development assistance projects, and they reduce the debt burden. In some ways, debt swaps are a kind of budget support. Like ordinary budget support, debt swaps also entail setting conditions for the way funds are to be spent.
Cancellation or capitalization of the pre-HIPC maturities of post-conflict countries
If Norway unilaterally cancels a post-conflict country’s pre-HIPC maturities, Norway will, when a post-conflict country achieves HIPC status, report a somewhat lower claim that would have been the case without such pre-HIPC debt relief. This will reduce the debt relief need of the country in question under the HIPC Initiative, if only marginally. Other creditor countries will then be able to give the country marginally less HIPC debt relief, while the total amount of debt relief will ultimately be the same. Rather than providing additional debt relief for the country, the only thing that has been achieved is to redistribute the burden among the creditor countries. The logic is completely analogous to the sit- uation that arises when unilateral measures are taken during the actual HIPC treatment.
Unless the unilateral cancellation by Norway of pre-HIPC interest and repayments owed by post-conflict countries can be excluded from the HIPC debt sustainability analyses, an analogous response to this problem would be to capital-
ize the maturities rather than cancelling them. The decision about whether these capitalized amounts should also be
forgiven can then be taken after the country has completed its HIPC treatment, analogously to Norway’s adaptation to the prevailing HIPC methodology. If appropriate, the capitalized amounts could be forgiven at the decision point. In that way, the main purpose of the extra contribution is achieved: to provide the country with more debt relief than it would otherwise have received, as an extra helping hand during a critical stage of development.
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Schemes of this nature can also have a num- ber of disadvantages. The operations are often complicated and demanding in terms of administrative resources, for the debtor and the creditor countries. It will put particular strain on the debtor country if many of its creditors wish to establish this type of fund. At worst, debt swap operations might also undermine the debtor country’s own decision- making bodies, since the creditor country will normally focus on its own priorities when determining how the freed-up funds should be used. If a third party such as a non-govern- mental organization is introduced as the implementing body, this might be perceived as a disregard of the country’s own public administration. If debt swaps are used to a great extent, moreover, they might have an inflationary effect and/or supersede other means of financing development measures by the debtor country.
In the light of the above purely bilateral debt swaps are difficult to combine with the emphasis that is placed on the importance of developing countries pursuing a coherent pol- icy and their own ownership of this policy. However, the disadvantages of debt swap operations can be counteracted through a coordinated approach by several creditor countries. If several creditor countries make a concerted effort to implement collective debt swaps instead of “going solo”, the administra- tive burden on the debtor country could be reduced to a minimum. If, in addition, an effort is made to coordinate debt swaps with nationally adopted development strategies and adapt the volume of the swaps to the countries’ macro-economic framework, debt swaps could be an effective development poli- cy instrument. The development effect of this type of coordinated effort could be far greater than what can be achieved through dispersed targeted interventions. Multilaterally coordi- nated debt swaps entail the transfer of the principle of donor coordination to the arena of swaps, which has hitherto been extremely “bilateralized”.
Such multilateral debt swap operations could bring increased debt relief for developing countries, since creditors who would not oth- erwise be willing to provide bilateral debt relief outside the Paris Club agreements would be motivated to participate. Among the difficult problems that will be encountered is the problem of agreeing on the modalities and objectives of such multilateral debt swap operations, and of finding a suitable institu- tional framework.
Debt swaps are not an option for HIPC coun- tries, whose bilateral debt will be cancelled over time in any event, whereupon there is no point in taking any additional measures. Consequently, debt swaps are only relevant for non-HIPC countries. These are chiefly mid- dle-income countries, which at present nor- mally do not qualify for debt reduction, but only for debt rescheduling, in the Paris Club.61Nor is it possible at present, due to
the Paris Club’s principle of comparability of treatment of creditors, to unilaterally cancel bilateral claims against such countries. On the other hand debt swaps, which can be regard- ed as an alternative route to debt reduction, are fully accepted, albeit within a limited vol- ume specific to each country (usually 15 or 20 % of outstanding debt or a maximum amount of SDR 15 or 20 million).
In a way, HIPC debt relief can be regarded as a multilateral debt swap, whereby a coordinat- ed group of both bilateral and multilateral creditors forgive debt on condition that the debtor countries commit themselves to imple- menting poverty-reducing measures in accor- dance with their own development strategies (PRSPs). One of the main challenges related to debt swaps with middle-income countries is to achieve a similar process.
If mechanisms can also be identified in mid- dle-income countries to ensure that the resources freed up through debt relief are utilised by the debtor country to promote development and reduce poverty, this will pave the way for implementation of multilater- ally coordinated debt swap operations for these countries.
After Pakistan renegotiated its debt in the Paris Club in December 2001, Norway launched the idea of supplementing the post- ponement of debt repayments granted to Pakistan with a multilaterally coordinated debt swap operation, in which interested cred- itor countries would participate. We launched this initiative, not solely in the interests of Pakistan, but also with other highly indebted middle-income countries in mind. A
Norwegian “think piece” on the format of this type of debt swap has been circulated interna- tionally in various versions, most recently in the Paris Club and to the French G8 chair- manship in May 2003 and at UNCTAD in Geneva in November 2003. It outlines three different options for multilaterally coordinated debt swaps: